Malaysia is a middle-income country in South East Asia with a population of 23 million people.

Matthew Grosse: Year 12 Economics Assessment. Task 1.

Malaysia is a middle-income country in South East Asia with a population of 23 million people. Malaysia was formed in 1963 through a merging of the former British colonies of Malaya and Singapore, including the east Malaysian states on the northern coast of Borneo. However Singapore seceded from Malaysia in 1965.

Below: A Map showing the country of Malaysia, Situated in South East Asia.

Malaysia is currently an export-oriented manufacturing economy and has developed rapidly from being an agriculture-based economy only 25 years ago, to one now dominated by manufacturing. This is shown by manufacturing growing from 13.9% of GDP in 1970 to 46% in 2002, while agriculture and mining, which together had accounted for 42.7% of GDP in 1970, dropped to 12% in 2002. Manufactures now account for about 82 per cent of Malaysian exports, of which most are Electronic goods. The composition of the Malaysian economy is:

Agriculture and Mining: 12%
Manufacturing: 46%
Services: 42%

Below: A Table showing key Economic Indicators for Malaysia from 1998 - 2003

Globalisation refers to the increasing integration of economies and markets leading to the emergence of a global market place. The process of globalisation has had a big impact on the Malaysian economy and culture.

Malaysia is a country embracing globalisation and adopting strategies to further enhance the positive effects of globalisation upon their economy. Since 1969 Malaysia has undertaken drastic economic changes in its implementation of the New Economic Policy(NEP), and then again in 1991 with the implementation of the National Development Policy (NDP). With these policies the government sought to rid itself of direct ownership in industry and to deregulate the financial sector. In the early 1990s with the implementation of the NDP, Malaysia enjoyed strong inflows of foreign direct investment, further enhancing its industrialisation process.

By the adoption of policies favourable to globalisation Malaysia has undergone huge amounts of economic growth since 1969 averaging GDP growth rates of around 6%, and up to 9% in the 1990’s along with other South East Asian neighbours. The rise in GDP led to a rise in Income per Capita and along with low inflation rates, the Malaysian standard of living has significantly increased. During this time of growth, the composition of the Malaysian economy has shifted from mostly agriculturally based to a now manufacturing and service based economy. With the increase of manufactured goods being produced in Malaysia, the level of exports from Malaysia has increased also at a high rate.

This shift in the composition of the Malaysian economy, large levels of Foreign Direct Investment an export orientated economy and the significant economic growth since the 80s are some of the reasons why Malaysia is now classified as a Newly Industrialised Economy and is close to becoming an Advanced Industrialised Economy.

Globalisation is the key reason for the Malaysian growth as it has allowed the Malaysian export orientated economy to specialise in industries such as manufacturing electronic equipment, which is an industry in which Malaysia has a large comparative advantage and absolute advantage over more advanced AIE’s. This advantage along with the lowering of import protections around the world has allowed Malaysia to now sell products to overseas markets while experiencing fewer barriers to trade.

Malaysia is a member of the trading blocs Asian Pacific Economic Co-Operation(APEC), Association of South East Asian Nations(ASEAN) and the ASEAN Free Trade Area (AFTA). These trading blocs each affect Malaysia’s economy, either by forcing them to lower there own tariffs and subsidies or by forcing other member counties to lower protection allowing Malaysia access into other markets previously protected.

ASEAN with the implementation of AFTA has been the bloc to most significantly affect Malaysia. The ASEAN Free Trade Area is a collective effort by ASEAN member countries to reduce/eliminate tariffs on intra-ASEAN trade in the goods sector. Their target is to achieve tariffs between 0-5% in 2003. So far this goal has been largely achieved with 99.5% of included products traded between ASEAN economies having tariffs of under 5%. Malaysian companies will be able to benefit from ASEAN by receiving: Preferential access into the large market of ASEAN with a population of 530 million people while having to pay ...

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The ASEAN Industrial Cooperation scheme (AICO), was introduced in

1996, it is an industrial cooperation program to promote the sharing of industrial activities amongst ASEAN-based companies. The scheme offers Malaysian companies the opportunity to engage in industrial collaboration programs and initiatives, which would further foster and enhance industrial linkages, and complementation among firms in the region. Also implemented by AFTA is The Investment Liberalisation Initiative. This offers opportunities for Malaysian companies to relocate their operation in an effort to compete globally. Malaysian companies are also encouraged to explore and engage in joint venture arrangements with their counterparts in other ASEAN countries.

ASEAN is a very valuable bloc in which Malaysia is part of, and ASEAN as a group continues to be Malaysia’s largest trading partner. In 2002, total trade with ASEAN was worth RM161.8 billion (RM is Ringgit the Malaysian currency.), accounting for 24.6 per cent of Malaysia’s global trade. Trade with ASEAN countries has grown at an average rate of 20.7 per cent per annum over the past five years.

The creation of the ASEAN market comprising 530 million people through AFTA, provides enormous potential for market expansion of Malaysian companies. Malaysia’s industries and businesses must attempt to take advantage of this potential to tap the ASEAN market by establishing linkages and strategic alliances, in other ASEAN countries, to derive maximum benefits from the sharing of resources, technology and Research and Development activities. With the larger market size and the elimination of intra-regional tariffs and non-tariff barriers through AFTA, Malaysian companies can also enjoy economies of scale in production. In addition,

AFTA can attract more foreign direct investments, which in turn can stimulate the growth of industries. Consumers in Malaysia are now offered a wider variety of quality goods produced regionally at lower prices. However, this also means that there is increasing competition for domestic industries for certain products, due to the liberalised Malaysian market, and can drive Malaysian industry’s out of business if it is unable to remain internationally competitive.

Malaysia is also a founding member of the WTO as it was a member in GATT since 1957. The WTO provides benefits to its members through the establishment of an international trading environment, which is transparent and predictable. These benefits are secured through the implementation of members’ obligations in the form of commitments to trade rules and market access negotiated on a multilateral basis. As a major trading nation, transparency and predictability in trade rules are important to Malaysia. Malaysia is able to adhere to its WTO obligations as it has: Subscribed to multilateral trading rules as a member of the GATT. Continuously been undertaking voluntary reduction and tariff elimination to enhance Malaysia’s competitiveness. Adopted open and transparent trade policies and measures over the years.

Malaysia is also a member of The World Bank and The International Monetary Fund. However even in times of need like during the 1997 Asian recession, Malaysia refused to accept IMF loans, instead Malaysia implemented its own strategic changes to cope with the hardships. Even though there was international criticism of Malaysia not accepting loans its has proven in Malaysia’s favour as Malaysia has since had high levels of growth and developed infrastructure in the financial sector to minimize or prevent any future recessions of the same magnitude as in 1997, without the need to repay World Bank loans and conform to their strict restructuring criteria.

Malaysia has also been adversely affected by globalisation in the past. As part of Malaysian reforms aiming to implement the National Development Policy, deregulation of the financial sector, privatisation of state-owned enterprises and lowering of tariff and protection barriers occurred. However, once markets were opened up, Malaysia soon found that along with the rewards of trade liberalisation, such as access to more markets, came with it the volatility of the financial world.

In 1997 Malaysia was hard hit by a contagion in local markets. The crisis of 1997 escalated when the Thai government devalued its currency. Thailand was in a bad economic state with an unsustainable current account deficit, rising foreign debts (particularly short term) and increasing difficulties in the financial sector. The foreign and local investors withdrew their money not only from the Thai economy but also from Malaysia and Indonesia in massive amounts. The contagion spread to Korea, Hong Kong and China by October that year. In the first two quarters of 1998, Malaysia, Hong Kong and China slid into recession. As Japan's yen, weakened, the crisis intensified. Thailand, Malaysia, Korea and Indonesia's GDP fell by 7%. Malaysia experienced a currency depreciation of 35% and a fall in equity prices of 52%. It had a low exposure to short-term foreign debt when the crisis broke but had to meet increased debt burdens due to currency depreciation.

The financial crisis affected all sections of the Malaysian society, individuals as well as businesses. Although the financial crisis had wide-ranging effects, particularly in terms of meeting the National Development Policy targets, Malaysia successfully avoided the extreme effects of the crisis that neighbouring South East Asian Nations experienced. Unemployment rose, but did not reach overly high levels, Poverty levels increased, but again not at high levels. Civil unrest experienced by some regional economies was not experienced in Malaysia. This was due to the strong initial conditions, both in terms of the real economy and the financial sector as well as the swift and sensible measures introduced by the Government during the course of the crisis.

Below: A Graph shows the change in Employment and Retrenchment during the 1997 Recession.

The effects of globalisation again hit Malaysia hard only years after the Asian recession. In 2001 due to a global economic downturn and the slump in the Information Technology (IT) sector, GDP in 2001 grew only -0.5% due to an estimated 11% contraction in exports, but a substantial fiscal stimulus package relieved the worst of the recession and the economy rebounded in 2002. Healthy foreign exchange reserves and relatively small external debt make it unlikely that Malaysia will experience a crisis similar to the one in 1997, but the economy remains vulnerable to a more prolonged slowdown in Japan and the US, which are top export destinations and key sources of foreign investment.

Malaysia has put in place many strategies to promote growth and development with very futuristic visions. In 1969 Malaysia implemented the New Economic Policy which aimed to eradicate poverty and advance economic position, this strategy was updated in 1991 and the National Development Policy was put in place the NDP placed greater emphasis on the globalisation of Malaysia by privatising government industry, deregulation of the financial sector, lowering of tariffs and other protection and increased trade with ASEAN. These strategies have been followed as close as possible and have only experienced minor setbacks with the 1997 Asian downturn. Currently the Malaysian Government has put in place the National Vision Policy (NVP). This policy also known as the "2020 Vision" strives for an eightfold increase in GDP and achievement of advanced industrialised economy (AIE) status by the year 2020. The policy sets privatisation as a cornerstone of national development, whilst retaining an emphasis on foreign investment to sustain industrialisation.

The Malaysian government along with its future planning and vision is also flexible and is proactive in changing due to external influences such as the 1997 Asian downturn. The government implemented many strategies to stop the recession and induce growth the following year. The government quickly revived the economy by, lowering interest rates, increasing government spending, corporate restructuring was undertaken and, most controversial of all, selective capital controls were introduced. These capital controls included the pegging of the ringgit at RM3.80 to the US dollar. Also The Corporate Debt Restructuring Committee has overseen the successful restructuring of a further RM44 billion in non-performing loans restructured since 1998, and the government has injected new funds into the ailing banking industry. From 1999, capital control measures introduced at the height of the economic crisis were progressively eased in recognition of the need to restore foreign investor confidence. The RM/US$ peg remains in place, but other capital control measures have now been abolished.

Malaysia's economy recovered strongly in 1999, achieving growth of 5.6 per cent. Largely escalating exports and public sector spending propelled the turn around. The economy also grew by over 8% in 2000. This upward trend in the Malaysian economy is based upon government policies adopted during the recession. Including relatively low interest rates, greater access to credit and the government’s expansionary fiscal policy. The 2003 budget continues the inclination towards fiscal deficits since the 1997 economic crisis. Government consumption and increased spending particularly have been crucial to ensuring positive growth in recent years. The government is targeting a fiscal deficit of 3.9 per cent of GDP for 2003 and aims to achieve a balanced budget by 2005.

During the 1997 recession Malaysia decided not to go to the International Monetary Fund for help, and instead set up corporate and financial restructuring agencies such as Danaharta and Danamodal. Danaharta and Danamdal were created to quickly restructure banks as well as corporate debt. Both institutions have started operations with a well-conceived policy framework. Their policies stipulate that bank and corporate restructuring should be carried out speedily to minimize the eventual economic cost, strategies for bank and corporate restructuring should be closely linked and only viable institutions should stay in business. These financial regulators are important to the Malaysian banking industry, which is relatively uncompetitive in international markets. The restructuring put in place should now allow the industry to be internationally competitive. The decision to not accept IMF help has spared many local companies from going through drastic restructuring and bankruptcy, like what happened in Thailand who accepted IMF loans. However, Malaysia's decision appears to be justified after being criticized by the international community for its drastic measures. The stock market is now on the rise, the country is registering a healthy trade balance, GDP is rising and consumer and investor confidence is up.

Malaysia’s economic policies and strategies have been well thought out, aiming towards future growth. As well as having vision the government was able to handle change in the external environment effectively with relatively little harm. With the current government having been in place for over 15 years, it has been able to plan towards the future well. This makes the future for Malaysia look bright. The 2020 policy in which Malaysia want to be classified as an AIE is likely to happen although unforseen circumstance may slow down this aim. A weakness in current policy in Malaysia that could slow development is the pegging of the Malaysian currency the Ringgit to 3.80/US$ this allows the Malaysian market to be undercut by other economies that have lower exchange rates. The Yuan has been also pegged to the US$ at a seemingly lower rate then the Ringgit, this allows Chinese exports to have a comparative advantage in export markets. The refloating or devaluing of the Ringgit could be beneficial to Malaysia in the future. Also the strategies adopted by the Malaysian government have been largely beneficial to the manufacturing sector. This however has left the agriculture sector of the Malaysian economy to suffer from increased competitiveness, Rice farmers in particular are now struggling to sell all of their crops and are creating surpluses which are unable to be sold.

Malaysia has maintained healthy foreign exchange reserves and a relatively small external debt, which make it unlikely that Malaysia will experience a crisis similar to the one in 1997. However with Malaysia being highly dependent upon exports to Japan and the USA the current economic slowdown hurts Malaysian growth as export rates are lowered, as is FDI in Malaysia from those countries. If this slowdown is prolonged the 2020 vision may have to be postponed. However while still not classified as an AIE Malaysia is sure to become one in the future, before or after 2020, it is not certain, but rising GDP and Income Per Capita has lead to an increase in Malaysian standard of living, which is likely to continue.

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